Manage costs sustainably

Most companies must manage their costs closely, regardless of their financial situation. In the article “Extreme Competition”, McKinsey notes that globalization, accelerated technological innovation and economic liberalization have combined since the nineties to create a hyper-competitive business environment. Now more than ever, businesses must cut costs to the strict minimum to ensure strategic success. And times of economic recession or hardship merely accentuate this phenomenon!

But optimizing expenditures is never easy. The long-term results of most cost-cutting programs are disappointing. According to a McKinsey study, large-scale cost-cutting programs were introduced by 230 S&P 500 companies between 1999 and 2003. Of these, only 10 percent were able to reduce their costs significantly after the first two years! Oliver Wyman consultants report the same finding for the banking industry. Analyses of bank performance since 2000 show significant improvements in the year following the launch of a cost reduction program. Two years down the road, however, performance ratios were back to their initial levels.

The fact is that companies find it difficult to manage costs on a sustainable basis, because everything seems to drive spending upwards. Whether due to the growing complexity of operations or the tendency of managers to focus on expanding their area of the business, there seems to be a permanent risk of cost increases. For our selected authors, cost-cutting programs have mixed results because they are principally designed to deal with crisis situations. While crash programs are often effective in resolving immediate cash flow problems, they are insufficient over the longer term. The challenge consists in developing the collective capacity to continuously adjust spending in a way that supports the strategy.